Macroeconomics: The Day Ahead for 27 November

It’s Thanksgiving Thursday, with trading volumes likely to be susbstantially reduced, perhaps all the more so given that tomorrow is also month, and for some trading compannies also financial year end. The day’s agenda is modest with the Bank of Korea’s as expected rate hold, China’s Indsutrial Profits, Australian Q3 CapEx and German GfK Consumer Connfidence to digest, and nothing more than the ECB minutes, Italian and EC Confidence surveys ahead. The overnight Australia Q3 CapEx data were instructive in terms of highlighting the imabalances that are emeging in many developed economies as a result of AI data centre related spending, with the information, media and telcoms sector seeings a 91.5% q/q increase in machinery and equipment spending, which along with a 40.7% q/q jump in aircraft deliveries powered the headline rise 6.5% q/q. That will add around 0.6 ppts to Q3 GDP, but will be offset by a drag from net exports as all of this will have been imported. The picture outside of these two sectors was that investment spending was rather weak. One should also be careful in assessing the large scale layoffs being announced at many tech sector companies, as it is not simply a case that AI is ‘taking jobs’, but rather that the sector has been over staffed and inefficient for many years, the layoffs are per se not really a genuine efficiency / productivity gain, but rather dealing with a problem area that has been evident for many a year.

** U.K. – Budget **

– There were very few surprises in the budget, aside from the bungled release of the OBR report 30 minutes ahead of Reeves speech to parliament, once again showing the current government’s ability to show itself in a bad light, even though it was obviously an OBR not a Treasury error. That said, so much of the budget had been leaked in the weeks before. Reeves addiction to tinkering was at its zenith, with no fewer than 88 measures announced, compounding what is already a woefully ponderous UK tax system. It was, as was already clear ahead of budget, testament both to the disaffected left wing of the Labour party, and Reeves making herself hostage to the Gilt market. While there is much more fiscal headroom (£22.1 Bln), the combination of the front-loaded measures to bear down on the cost of living, and the heavily backloaded increases in taxation still leaves the risk that more tax hikes and/or spending cuts may need to be implemented if growth proves to be weaker than expected. It was also full of contradictions, for example the increased tax breaks and incentives for start-ups was heavily offset by the cut in thresholds for Venture Capital Trusts, and thus likely to lower funding availability. While the DMO remit was a little lower than expected at £303 Bln, it remains vast and expanding the UK T-Bill market is a half measure on lowering Gilt issuance & duration and debt servicing costs, and with the Current Account deficit expected to rise to 3.5% of GDP according to the OBR’s estimates, it underlines the old adage of the UK being overly reliant on the ‘kindness of strangers’. But the measures overall should ensure that the budget passes into legislation in parliament, but the left wing of the Labour party will surely feel even more emboldened to challenge Starmer and Reeves on other policy measures, after wringing the concessions in this budget. As such political uncertainty an d instability will continue to stalk the pound and Gilts, even if this has put aside immediate threats.